In2assets Blog

SHOWING YOUR HAND: A MYSTERY OF AUCTIONS

06 Nov 2017

By Carl Kleinhans
Property reference https://www.in2assets.co.za/property/2087/commercial-commercial-building-auction-kwazulu-natal-amanzimtoti-12-rosslyn-road
Auctions are mysterious by nature as it’s a no show of hands affair. The Seller keeps his Reserve Price undisclosed and the Buyer keeps his opinion of value undisclosed until the final stand off on the day of auction. This type of poker marketing has been used for centuries and proven to deliver real results even if the result sometimes aggrieves the participants. It’s a Cloak and Dagger come Punch and Judy affair.

Why do Seller’s not disclose a Reserve Price? Ok maybe I am generalising as I’m about to share a contradictory case involving an upcoming auction . But first let us consider that a Seller would not ordinarily want his Reserve price shared purely because he wants to hold out for a better outcome. This does not mean that Reserve Prices are cast in stone which is what Buyers often forget when choosing not to participate in an Auction. In most instances Sellers will consider offers below Reserve when the auction is concluded. It is always a better strategy to determine your own value or offer and present that at auction.

Why do Buyer’s not disclose their opinion on Value? Well the principal applies where a Buyer would enter a bidding process hoping to spend the lowest possible amount of money. Showing his hand before auction may jeopardise his position if post auction negotiations are required. There are unfortunately many Buyers who feel that auctions are mechanisms used to drive prices up but this is completely untrue. Generally most serious Buyers would consider value at around the same level which is why auction really gives us a true market result. Many Sellers will respect this.

As an auction marketer I know that a Buyers favourite question is always “What is the Reserve Price”. Unfortunately, marketers of auction properties may not, by agreement with Seller’s, disclose the Reserve Price for reasons mentioned above. Disclosing a Reserve Price will defeat the object of an auction for two reasons; 1) The Seller loses the opportunity to benefit from an outcome in his favour and 2) The Buyer decides the Reserve is too high and declines to participate. So why is the latter a disadvantage to the Buyer? Simply because the Buyer is never aware of the Seller’s true position and what Offer he may well accept on the auction day. There may be extenuating circumstances for a Seller to forgo his expectations and settle for “a bird in the hand”. I hope this will justify the reason why Reserve Prices are kept private.

Showing your hand – A real time opportunity

Occasionally and yes I concede indeed rarely a Seller will decide to reveal his Reserve Price publicly. A case in reference is a property which will be showcased at an auction in Durban on 5 December 2017 where a Seller has instructed In2assets to publicly display his Reserve Price. Well you might think this is a rather unusual strategy as it defies the laws of an auction but let us consider the merits of this particular case. The Seller is focussing on a new venture which will require his full and urgent attention as from January 2018. So there are two valuable factors which Buyers will appreciate; 1) This is a good trading area which sustained a business for 25 years profitably and 2) the Seller is a very motivated Seller.

I have considered the Reserve Price of R2 490 000, which is quite low, and interpreted this as an investment opportunity for an investor and the results are really pleasing in my opinion:

If you were to acquire the property at Reserve you will need a mere rental income of R25/m2 to yield 12% annually. Obviously R25/m2 is extremely low for a retail property but if you were to secure a tenant at R40/m2 (considered very fair in my opinion) you would yield around 22% annually etc. This is a remarkable opportunity for both end-user and investor.

What I like about this particular property is that it lends itself well to accommodating multiple tenants for various uses. You could secure up to 4 separate tenants ranging from warehousing / distribution to retail. This is a very busy thoroughfare road with a high number of vehicles passing daily.